Bank Support & Business Recovery Insight, July 2024

Image credit: Glenn Carstens-Peters for Unsplash  

Christie & Co's Stephen Owens speaks at Pub Conference

Stephen Owens, Managing Director of Pubs and Restaurants at Christie & Co recently spoke at Propel’s Excellence in Pub & Bar Retailing Conference. He highlighted recent market conditions, stating that the pub market is currently polarised between properties under £600,000 and premium assets. While there’s strong demand for pubs under £600,000, the middle ground faces challenges due to funding difficulties, driven by interest rates and inflation. Cash buyers in the lower price range focus on property value, while premium asset buyers see it as a rare opportunity. Stephen explained, “Your cash buyer under £600,000 just takes a view on inherent property value underpinning the risk, and equally, the real premium asset buyers out there just view it as a once in a generation opportunity to pick up some really [high quality assets].”

He went on to comment that during the pandemic, managed operators were acquisitive, but now tenanted pub companies are active, predicting continued acquisitiveness among these, with cautious returns to the market from the managed operators.

Additionally, he remarked that until interest rates start to come down and the economy improves, we will not see a return to previous pub asset prices, following an 8% fall during 2023.

He believes that private equity are most likely to focus on distressed and value opportunities, whilst larger pub operators start to “drip feed” properties into the market.

He also commented on how the growth of the franchised model is an interesting development within the industry. He explained that “it sort of has the benefits of the managed model in terms of the economies of scale and the cost control of a tenanted model, and we’ve seen that grow to something like 2,500 pubs.”

The inflated cost of capital

Inflation started to accelerate from a low point of 0.2% in August 2020. When it hit 5.4% in December 2021 the Bank of England (BOE) intervened by raising interest rates to 0.35% from a record low base rate of 0.1%, the objective, to bring inflation down to the Government’s 2% target.

Further rate rises ensued, but inflation remained on an upward trajectory peaking at 11.1% in September 2022. Ongoing supply chain issues from the Covid 19 pandemic, the outbreak of war in Ukraine in early 2022, and the associated energy crisis that followed, coupled with workers demanding higher wages, as the cost of goods and services rose, all had an effect. It became apparent that higher for longer interest rates rises would be needed to tame inflation. After 14 consecutive rises, rates peaked in September 2023 at 5.25% and inflation continued to decline, reaching the Government’s 2% target in May 2024.

Whilst this is encouraging news, the ICAEW says ‘any relief over inflation returning to target should be tempered by the legacy that the cost-of-living shock has left behind, including price levels that are more than 20% higher since inflation was last at target’.

The CBI does not expect the BOE MPC to cut rates before August and goes on to say that the pace of any rate cuts beyond that is likely to be gradual. This view was further reinforced by Huw Pill, the BOEs chief economist, who stated that he is not yet convinced by the case for an August interest rate cut, but said a rate reduction was still a “when-rather-than-if”.

In its quarterly health check on the UK financial and banking system, the BOE said that three million borrowers who took out mortgages on fixed rates at or below 3% will see sharp increases in debt servicing costs, typically 28%, by the end of 2026, as their mortgage deals come to an end. Moreover, The Federation of Small Businesses have noted that some CBILS loans have a floating rate of interest and therefore repayments have significantly risen in line with rate. The jump in borrowing costs since December 2021 will have impacted the margins and profitability of many businesses, which will restrict their ability to invest. These factors will have a knock-on effect on the economy.

It appears that both inflation and the cost of capital are likely to continue to be a burden on consumers and businesses alike. Household bills, particularly food and energy are in real terms higher than in previous years and any reduction in interest rates is likely to be in small increments over a prolonged period.

Immigration and the labour force

The 2024 General Election put immigration at the forefront of issues to be dealt with by all of the major parties hoping to be elected into Government. According to a recent YouGov poll, 43% of UK residents believe immigration has a negative impact on society.

Following Brexit, the UK introduced a points-based immigration system in which migrants needed 70 points to be eligible to work in the UK. Alternatively, skilled workers with a job offer from an approved sponsor could also apply for a visa. Unfortunately, the hospitality industry was not catered for under this new system.

Before Brexit, within hospitality, roughly 25% of employees were EU migrants. With the new workforce movement systems, non-UK workers can no longer be employed within the UK if they earn less than £37,800 annually. This increased in April 2024, up from £26,200. This has created significant challenges and led to increased staff shortages within the hospitality sector. According to the ONS, there are roughly 109,000 vacancies within the sector, significantly higher than pre-pandemic levels.

There have been calls from independent bodies and representatives of the hospitality industry for the Government to consider adding hospitality sector jobs to the Immigration Salary List, or to consider an alternative visa scheme for workers who don’t currently qualify under the points-based system, to help reduce the shortages.

UKHospitality’s CEO, Kate Nicholls, has said “There needs to be a serious debate about a pragmatic and stable employment plan that balances investment in skills and training, including reform of the apprenticeship levy, with sensible access to work visas.”

Similarly to the hospitality sector, the care sector suffered with significant labour shortages post-Brexit, having previously relied heavily upon labour from the EU. As in hospitality, many care sector job roles did not meet the criteria required for workers to qualify under this new points-based system and as such, care homes struggled to fill their open vacancies. The Government sought to address this issue in February 2022 by adding care workers to the Shortage Occupation List (“SOL”, which is now the Immigration Salary List).

The result following the change in February 2022 is that the care sector was able to fill roughly 50,000 vacancies with non-UK workers, with immigration figures showing that almost half of all visas provided under the SOL in 2022 and 2023 were related to the care sector. This has allowed UK care homes to reduce their reliance on agency staff and reduce costs, as well as improve patient care, all of which has had a positive impact on the sector. However, as of 11 March 2024, overseas care workers will no longer be able to bring their partners or children with them when moving to the UK, which is again expected to cause the problems for the sector.

It remains to be seen what policy changes or implementations the incoming Labour Government will make on immigration and how that will impact workforce challenges.

Childcare & Education - Christie & Co Market Insight 

Christie & Co has launched its Childcare & Education Market Insight report, which captures key events, sentiments and activity that shaped the children’s day nursery, independent school, SEND education, and children’s social care sectors in the first six months of 2024. The full report can be viewed here.

Buoyant transactional markets

In the first half of 2024, we sold over 500 properties across our specialist sector teams - Care, Medical, Childcare & Education, Hotels, Pubs & Restaurants and Retail & Leisure. This represents a 38% increase on the same period last year and illustrates that the markets have rebounded from a lack lustre performance in 2023. The markets last year were characterised by a slowdown in operational real estate transactions as sellers pricing expectations were not met because buyers adjusted the level of their offers to reflect increased operating and financing costs. With inflation declining and the interest rate stablishing from late 2023, confidence in the markets has boosted deal activity in H1 this year demonstrating investor appetite for operational real estate in our markets.

To learn more about bank support and business recovery, contact: Stephen Jacobs: stephen.jacobs@christie.com  / 07791 982 977 or Ben Thompson: ben.thompson@christie.com /  07756 8785 22